Econ 3

Choose each option that is correct about fiscal policy. More than one option may be correct. An expansionary fiscal policy leads to complete crowd-out in the long-run. Expansionary fiscal policy will decrease national income in the short-run. Expansionary fiscal policy tends to increase national income in the short-run, but it will also tend to increase inflation. If policymakers are concerned about inflation being too high, a fiscal contraction would help reduce inflation in the long-run.

An expansionary fiscal policy leads to complete crowd-out in the long-run. Expansionary fiscal policy tends to increase national income in the short-run, but it will also tend to increase inflation. If policymakers are concerned about inflation being too high, a fiscal contraction would help reduce inflation in the long-run.

The short-run Phillips curve is ___________ because increases in aggregate demand lead to short-run increases in GDP, but also tend to increases prices. The long-run Phillips curve is _________ because in the long-run, aggregate supply is constant with respect to prices.

Answer 1:Correct!downward-sloping Answer 2:Correct!vertical

The​ short-run aggregate supply curve slopes upward because of all the following reasons except: in the short run, as prices of final goods and services increase, some firms are very slow to adjust their prices, thus their sales increase. in the short run, prices of final goods and services adjust slowly due to the existence of menu costs. in the short run, as prices of final goods and services increase, input prices react more slowly. in the short run, an unexpected change in the price of an important resource can change the cost to firms.

Correct! . in the short run, an unexpected change in the price of an important resource can change the cost to firms.

Which of the following is correct about the Phillips curve in the long-run? All of the other options are correct. The Phillips curve is vertical in the long-run because the short-run Phillips curve will shift as people update their inflation expectations. The fact that the long-run Phillips curve is vertical reflects the fact that the economy cannot permanently stay below the natural rate of unemployment without experiencing rising inflation rates. The long-run Phillips curve is vertical because unemployment being below the natural rate causes rising wages and input costs. This causes decreases in short-run aggregate supply.

Correct! All of the other options are correct.

Suppose that changes in financial markets make consumer credit more widely available. This causes an increase in autonomous consumption of $150 billion. The marginal propensity to consume is 0.8. Holding all else equal (including the price level), which of the following is correct? Equilibrium national income will rise by $750 billion. Equilibrium national income will rise by $187.5 billion. Equilibrium national income will rise by $120 billion. Equilibrium national income will fall by $120 billion.

Correct! Equilibrium national income will rise by $750 billion.

Suppose the Fed decides to set interest rates based on a Taylor Rule. Suppose the target inflation rate is 2.5%, and the long-run equilibrium real rate is 2%. Which of the following is correct? If the current inflation rate is 3.5% and the economy is at potential GDP, the Federal Funds rate should be set at 6%. For every one-percentage-point increase in the inflation rate, the Taylor rule suggests reducing interest rates by 1.5 percentage points. If current inflation is 1.5% and the output gap is -1%, the Federal funds rate should be set at 4%. None of the other options are correct.

Correct! If the current inflation rate is 3.5% and the economy is at potential GDP, the Federal Funds rate should be set at 6%.

Suppose the Federal Reserve wants to increase the money supply by $2 billion using open market operations. The required reserve ratio is 10%. Which of the following is correct? The Fed should buy $200 million in T-Bills. The Fed should sell $200 million in T-Bills. The Fed should buy $20 billion in T-Bills. The Fed should sell $20 billion in T-Bills

Correct! The Fed should buy $200 million in T-Bills.

Assume that the velocity of money is constant and that the real GDP growth rate this year will be 2.5%. If the growth rate of the money supply this year is 6.2%, which of the following would the quantity theory of money predict? The inflation rate will be 6.2%. The inflation rate will be 3.7%. The Real GDP growth rate next year will be 6.2%. The inflation rate will be -3.7%.

Correct! The inflation rate will be 3.7%.

The money demand curve is downward-sloping because: When the price level rises, consumers' need for money to use in purchases of goods and services increases. When disposable incomes increase, consumers' demand for goods and services rises, which also increases their need for funds in transaction accounts. The nominal interest rate is the opportunity cost of holding money. None of the other options are correct.

Correct! The nominal interest rate is the opportunity cost of holding money.

Which of the following is incorrect about the effects of the Fed decreasing interest rates? This action reduces the cost of borrowing for consumers, which will increase consumption spending. This action decreases returns in the stock market, which spurs decreased investment spending. This action would tend to cause the US dollar to depreciate, which would tend to increase US net exports. All of the other options are true about the Fed decreasing interest rates. .

Correct! This action decreases returns in the stock market, which spurs decreased investment spending.

Suppose you withdraw $200 in currency from your checking account. Think about how this transaction will affect your bank's balance sheet. Which of the following is correct? This transaction will increase your bank's liabilities by $200 and increase its reserves by $200. This transaction will reduce the bank's reserves by $200, but it will have no effect on its liabilities. This transaction will reduce the bank's liabilities by $200 and reduce its reserves by $200.

Correct! This transaction will reduce the bank's liabilities by $200 and reduce its reserves by $200.

The structure of the Phillips curve suggests that if the Federal Reserve wants to achieve stable inflation rates, it must attempt to keep the unemployment rate near the natural rate of unemployment. True False

Correct! True

Suppose the government passes a $250 billion infrastructure improvement program, increasing its purchases by this amount. The MPC is 0.64. Which of the following is correct (all else being equal)? Equilibrium national income will increase by about $694 billion. Equilibrium national income will increase by about $391 billion. Because this is spending on infrastructure, it will also cause the long-run aggregate supply curve to shift to the left. None of the other options are correct.

Equilibrium national income will increase by about $694 billion.

Suppose the government passes a bill making unemployment insurance more generous. It is estimated that this will lead to an increase of about $100 billion in spending on this program. If the MPC is 0.72, which of the following is correct (holding all else equal)? Equlibrium national income will increase by about $357 billion. Equilibrium national income will increase by about $257 billion. Equilibrium national income will decrease by $100 billion. Equilibrium national income will decrease by about $357 billion.

Equlibrium national income will increase by about $357 billion.

Which of the following is accurate about crowd-out in the short-run? In the short-run, crowd-out occurs because increased spending increases the demand for money, which drives up interest rates. Crowd-out in the short-run occurs primarily because increases in aggregate demand cause inflation to rise. Most economists believe there is complete crowd-out in the short-run. None of the above

In the short-run, crowd-out occurs because increased spending increases the demand for money, which drives up interest rates.

Which of the following is correct about the Phillips Curve? It captures a short-run tradeoff between unemployment and inflation. It is likely that the existence of the Phillips curve means that the Fed can make policy based on weighing lower unemployment against higher inflation. The Phillips curve is an empirical relationship that exists due to movements in short-run aggregate supply. All of the other options are correct.

It captures a short-run tradeoff between unemployment and inflation.

Suppose that over the next year, the government spends $1.4 trillion on goods and services. It spends an additional $1.8 trillion on transfer payment programs. Finally, it collects about $2.1 trillion in tax revenues. Select each of the following answers that is correct; there may be more than one right option. The government is running a deficit of $1.1 trillion. The government is running a surplus of $0.7 trillion. This budget will increase the national debt by $1.1 trillion. This budget will decrease the national debt by $0.3 trillion.

the government is running a deficit of $1.1 trillion. This budget will increase the national debt by $1.1 trillion.